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- iPhone is Over Party
Good afternoon,
Elon is cold-tweeting CEOs to negotiate, Forbes 30 Under 30 was just released, BlockFi is the newest confirmed kill in the crypto crash, and stocks sank yesterday as Fed officials hinted more rate hikes are coming. JPow is speaking tomorrow, and protests across China are boiling over today.
Let’s dive in.
Bottom Line Up Front
Crypto lender BlockFi filed for bankruptcy, becoming the latest crypto firm to collapse in the wake of FTX.
Disney’s returning CEO Bob Iger told employees at a company town hall yesterday that he won’t be halting some of his predecessor’s more controversial decisions, including requiring theme park reservations, moving thousands of staffers to Florida from California, or freezing hiring.
Value-focused hedge fund Liontrust Tortoise, up 22% this year and beating 99% of its peers, is going against the tide to bet on the sinking shares of Meta.
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Deep Dive: iPhones are Over Party
Recent coverage has been a dumpster fire for Apple, compounded by the actual fires going on its main manufacturing hub. Let’s recap current unrest in China, what it’s meant for Apple, and how that’s compounded by domestic concerns.
The TL;DR on the situation so far
Turmoil in China is likely to result in a production shortfall of ~6 million iPhone Pro units this year.
Apple restricted AirDrop capabilities in China ahead of anti-government protests, leaving dissenters without their key communication tool as demonstrations spread.
Apple is threatening to remove Twitter from its App Store, cites Elon Musk, adding that Apple has already withdrawn most of its ad spend.
How it started
In late October, Foxconn, the world’s largest technology manufacturer and Apple supplier, was making headlines after its factory in Zhengzhou was hit by a Covid outbreak. The complex, where half of the world’s iPhones are made, employs approximately 300,000 people. Factory workers live at the Foxconn dormitories and usually eat inside the campus.
Apple relies on the Chinese factories to assemble 70% of all its iPhones, with the others being manufactured by the Taiwanese giants Pegatron and Wistron Corp.
To put it lightly, it was, at best, mismanaged. As living conditions worsened amid the wave of Covid cases, employees started fleeing the Foxconn “factory city,” starting their journeys home on foot, walking on highways and fields while carrying their blankets, bags, and other personal belongings.
After the big walk-out, the company dealt with a staff shortage so local government staff teams were called in, allegedly to get into the factory and help with the recruitment of new employees. Unsurprisingly, they faced challenges in meeting their targets and attracting enough new workers. When they did not meet their targets, frustrations at the factory site were allegedly building up due to the increased pressure on the employees who had to continue working. Throughout the situation, Covid cases were still popping up.
In the early morning of November 23rd, rumors grew strong on Chinese social media about something happening at Apple’s iPhone city. The majority of posts related to the issue are: “What happened?” and “Can anybody send me a private message on what happened?” “Is it true that they are filming a movie at Foxconn or is something else going on?” Due to censorship, many people did not understand the exact circumstances surrounding some of the videos that circulated online
Later the same day, videos on Chinese social media showed hundreds of workers protesting and clashing with police at the Zhengzhou Apple factory. The videos showed violent clashes between workers and thousands of hazmat-clad police deployed at the facility. Reports alleged workers had been, for several weeks, protesting living conditions and delays in pay amid a COVID-19 outbreak and subsequent lockdown.
How it’s going
Apple projects the unrest is likely to result in a production shortfall of ~6 million iPhone Pro units this year. Its shares fell 2.6% to $144.22 yesterday, marking the biggest one-day drop in more than two weeks. They have declined 19% this year.
The continuing unrest at the plant has turned the spotlight on China’s “zero-COVID” policy and the impact on both workers’ conditions and global supply chains as the world’s second-largest economy continues with stringent COVID-19 measures.
Apple and Foxconn increased their estimates of the Zhengzhou shortfall over the past two weeks due to growing disruptions. Though analysts currently expect Apple will be able to make up the 6 million units in lost output in 2023, the unrest in its iPhone city is now just one of many.
Limited Airdrop
The protests in China have made life more difficult for Apple’s PR department than an analyst crunching numbers for five live LBO deals. As anti-government protests continue to swell across China, a key communication tool used by dissenters for organizing and sharing information has now been curbed — Apple's AirDrop feature.
Restrictions to AirDrop were enacted exclusively in China earlier this month after it was used to share posters opposing President Xi Jinping and the Chinese government. The blocks came just weeks before widescale protests against the state's strict zero-COVID policies began this weekend.
The changes, which were first reported on November 7, include limiting the amount of time an iPhone user can use the "Everyone" setting to receive content from anyone — both contacts and non-contacts — to just 10 minutes.
Typically, users can opt to receive AirDrop content from everyone for an unlimited period of time. The tool has been used among protesters to disseminate information about demonstrations, and was pivotal to organizing protests in Hong Kong and bypassing China's "Great Firewall" in 2019.
To cut Tim Cook some slack, Apple has disclosed to Bloomberg that it intends to roll out the setting globally to prevent unwanted file sharing. Allegedly. For now, changes to the feature remain exclusive to China, and some say they may be impeding mass protests that erupted across the country in response to COVID-19 measures.
Musk v. the Tesla Graveyard
Not to be outdone, America’s favorite relative you wish would get off social media decided to join Apple’s cancellation party, kicking off his latest Twitter beef. Yesterday, Musk accused Apple of threatening to withhold Twitter from its App store “without giving any reason for doing so.”
In another Tweet, Elon Musk claimed that Apple had mostly “stopped advertising on Twitter.” He also questioned whether the company hated free speech in America.
Musk’s relationship with Apple was fraught even before he took over Twitter. Musk has previously noted to the press that Tesla had become a recruiting ground for Apple as the tech giant explored its own car ambitions. “We always jokingly call Apple the ‘Tesla Graveyard,’” he was quoted saying in 2015.
Analysts cite that Apple reducing its advertising on Twitter seems probable, given similar decisions by significant brands to halt or suspend advertising on the platform. Earlier this month, CBS News stopped its activity on Twitter out of “an abundance of caution.” They held out for about as long as Kim Kardashian was a private equity investor. The company was soon back to tweeting after just a day.
Musk’s tweets highlighting the activities of Apple have led to many of his Twitter followers threatening to boycott Apple products. More, Musk’s followers claim they will switch to Android if Apple removes the social media platform from its App stores.
Some experts believe there is a more straightforward solution: Tesla building its own phone and releasing it to bypass all the censorship by Apple or Android. In one tweet encouraging the move, a Musk fanboy recommends: “Half the country would happily ditch the biased, snooping iPhone & Android. The man builds rockets to Mars, a silly little smartphone should be easy, right?”
Guess Twitter hasn’t solved filter bubbles yet.
What now
Elon Musk does what he wants, and evidently, buys what he wants at aggressive inflation-adjusted prices. Couple counseling clearly isn’t on the books for Cook or Musk. But for Cook, his concerns are far more severe than a fellow tech CEO trying to negotiate via his own platform.
The interdependence between Apple and Foxconn has resulted in a highly efficient outsourcing architecture. But it has increased both partners’ exposure to “China risk.” Every incident in the country, whether it’s a labor movement, a natural disaster, or a political decision, immediately impacts its operations and revenues.
In response to these threats, it is reported that Apple has accelerated the diversification of its production bases outside China. Foxconn began assembling iPhone 14s in India in September 2022. Its rival, Pegatron, launched production of Apple’s latest smartphone in October 2022 at a factory in the state of Tamil Nadu, where it was already assembling the iPhone 12s. Analysts estimate that in the medium to long term, Apple’s goal is to deliver 40-45% of iPhones from India.
Currently, that ratio is below 4%.
Last year, 67% of the world’s smartphones were assembled in China, according to Counterpoint Research. Five years earlier, that ratio was 74%. Apple competitor and your grandfather’s flip phone manufacturer Samsung already no longer makes any smartphones in China. The South Korean group has located more than 50% of its production in huge factories in Vietnam and also makes phones in India and Brazil.
It is now up to Tim Cook to maximize Apple’s growth potential. Eyes will be on how he’ll be able to embrace agility and establish teams in other strategic and regional locations beyond China.
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